#8: Don’t Start Day Trading Until You Watch This…
Hey hey, what's up my friend.
I know want to day trade and you want the freedom that it could present.
You want to be trading by the beach, by the pool, by the seaside, sipping a glass of Piña Colada.
But let's be honest down here.
Day trading is more than that.
That's why in today's lesson…
I want to share with you the truth about Day Trading, so you don't get caught with your pants down.
I’ll also provide you with practical tips and techniques for you to survive in your day trading career.
Here’s what you’ll learn:
- The biggest reason why day traders fail at Day Trading (and it's nothing to do with your trading strategy or markets)
- You also learn why the environment is rigged against you and how you can level the playing field
- The REAL cost of Day Trading that most gurus will never tell you
Then let's get started.
The biggest reason why traders fail
The biggest reason why traders fail at Day Trading is not because of the trading system or strategy.
It's because of your transaction costs.
Let me prove it to you with very simple math.
Let's assume that you have a $5000 trading account.
Let’s say every time you buy, it costs you $5 and every time you sell, it costs you another $5.
So each trade costs $10.
Let's say you have an average of about 2 trades per day and each month has 20 trading days a month.
Each month, you’ll take 40 trades.
Multiplied by $10 per trade, it's going to cost you a total of about $400 a month in transaction cost.
You have a $5,000 trading account and you need $400 a month just to breakeven.
Before even seeing a single cent of profit…
You must cough up $400 for your transaction cost.
If you put things in relative terms, that is equivalent to 8% monthly return just to break even.
On a yearly basis, that's a 72% return that you need to breakeven.
Before even your trading year has started, you’ll need to make a minimum of 72% a year.
Think about this:
Are you able to consistently generate 72% a year?
I don't think so.
So what's the solution to this?
Firstly, you must get a low-cost broker.
Don't randomly start with any broker because transaction costs will have a huge impact on your trading results as a day trader.
So go with a low-cost broker.
Do a Google, research and review.
This is even more important than your trading system itself.
If your system makes 40%, 50% a year but you're paying 72% in transaction costs – you’re still going to be a loser.
The truth about small account size
Is the small account size enough to trade for a living?
Let's do it with math.
Let's say this time round you up the ante and you have a $10,000 trading account.
I don't know how much you need to live for a month.
Maybe you need $2,000 to live a month.
Putting things in perspective, $2,000 a month on a $10,000 trading account is 20% return a month.
And putting things in a yearly perspective, you’re looking at a return of 240% a year.
So if you have a $10,000 trading account and you want to make $2,000 a month, you're looking at a return of about 240% a year.
I think you know where I'm coming from right?
Clearly, a small trading account like a $10,000 trading account won't cut it.
Well, there are a few solutions to this:
Don't survive on $2,000 a month.
If you reduce it to surviving on $200 a month then that's about 2% a month – that might be doable.
But I don't think you can survive on $200 a month.
So what's the solution?
Start with a decent account size.
I know it's a bummer, but this is the truth.
If you're going to start with a $5000, $10,000 trading account you can trade but don't expect to earn a full-time living from it.
You need to have a decent account size to start off trading.
The minimum I would say is $100,000.
So if you make 2 to 3% of that a month, that's about $3,000 a month.
Your environment is against you
What do I mean by that?
So when you’re day trading for a living, you can imagine that you’ve certain expectations that you want to meet per month.
Let's say you want to make like $3,000 a month to pay the bills, the mortgage, the house allowance for the kids, whatsoever.
So with a $100,000 account, 3% every month is all you need.
But here's the thing, trading isn't smooth sailing all the time.
Market conditions change and you'll go into a drawdown!
And imagine that you’re currently in the drawdown right now…
Maybe it's the 15th of July and you've lost 3% of your trading account.
And right now, you’re holding onto a trade and that trade is about to be a loser as well.
So if that trade becomes a loser, you're down 4%.
Can you imagine your thought process right now?
“Man, I'm down 3% a month man Rayner and this trade is not looking too good man what should I do?”
“Maybe I could widen my stop loss, if I widen my stop loss and the market reverses, I might not have to take a losing trade on this!”
“Or how about let me average into my losers and the market does a slight rally, I could make back everything and more! Sounds good!”
Can you see how that thought process came about?
The thought process came about because your environment is against you!
You’re in an environment where it's hard to thrive because of the circumstance you're in:
Paying bills, mortgages, liabilities, kids, school, whatsoever.
So what can you do about this?
My suggestion is this…
When you want to get involved in day trading, you’ll need to remove the ‘need to make money’ syndrome.
The thought process that I had shared above is the ‘need to make money’ syndrome.
And you need to remove this.
So you’ll need to set aside 12 months of living expenses.
No matter what happens, it doesn't matter because you already have money set aside to pay the bills and whatever you need to pay.
So you can just focus entirely on your trading so you don't have weird actions like averaging into your losers, doubling down and stuff like that.
You're a slave to the market
Forget about trading 1, 2 hours a day forget about trading by the pool, by the seaside, whatsoever.
Day trading is a full-time endeavour.
Let me just break it down for you.
There are 3 different stages:
- Pre-market hours
- Market hours
- Post-market hours
1. Pre-market hours
You're not just going to open your computer, then draw some lines and buy when the price hits support or sell when the price hits resistance.
No, it doesn't happen that way.
You got to come in prepared!
And how do you prepare?
Firstly, before the market opens, you have the pre-market hours.
During the pre-market hours, you want to be aware of the high-impact news that might affect the market you're trading.
You want to draw the key levels like support resistance, pivot points, etc. that you want to be trading for the day.
Then you want to develop a trading plan for the day.
For example, what is the current market structure?
If it's trending higher, I want to be buying dips in this market session.
If it’s ranging, I want to enter at support or resistance.
If the market is in a downtrend, then I want to be selling rallies.
So the pre-market hours is when you’ll prepare for your trading day ahead.
Conservatively, you need 1 to 2 hours to plan for your trading session.
2. Market hours
Market hours are when the market is open, and you’ll be sitting in front of the screen.
You’ll be watching the market to see if there are any trading opportunities.
You can set some alerts and stuff like that.
But it's unlikely that you can get away from the desk for very long.
Why is that?
Let's say that you're trading on the 5 minutes timeframe.
Every 5 minutes, a new candle is going to paint.
Yeah for the 4 minutes and 59 seconds, you run away and play a game on PS3, go to the toilet or drink some water.
But you got to be back.
You’ll need to see how the next candle performs because that could be your:
- Entry trigger
- Exit signal
- Trade management you've got to do
I don't know!
So the lower the timeframe that you're trading, the more glued to the screen you’ve got to be.
Unlike someone who trades off the daily timeframe, where 1 candle is painted only every 24 hours.
Clearly, you don't have to be at the screen all day.
You get my point.
3. Post-market hours
And after the market hours you have got the post-market hours.
After your trading day is done, you don't just pack your bag…
“Oh! party time!”
You’ve got to journal your trades and see what happened today, like:
- When do you make money?
- When do you lose?
- Do you follow your trading plan?
- Do you screen capture your charts to review them later?
So during the post-market, you got to do your wrapping up and concluding of your daily session.
If you add up the number of hours at each stage:
- Pre-market hours: 1 hour
- Market hours: 10 hours
- Post-market hours: 1 hour
You're looking at a minimum of 12 hours a day trading the markets.
That's half the time that you are awake.
For some of you, trading might be a passion then please feel free to go ahead.
For those of you who think day trading is not really for you, what can you do?
Well, there are other trading methods out there like:
- Swing trading
- Position trading
I won't go into too many details but they pretty much trade off the higher timeframe.
The real cost of day trading
So here's the thing…
Let's say you’re a profitable day trader and you make $40,000 a year day trading.
Let me ask you a trick question:
How much did you make this year?
Did you say $40,000?
Well, that's not quite the complete picture.
Because you can't just take the $40,000 at face value.
Let's say before day trading you were working at a job earning $60,000 a year.
Your cost of day trading is actually $20,000 and that is your opportunity cost.
Because you can be at somewhere else working full-time making $20,000 more.
So that is the cost of day trading.
(And I've not even factored in time when you're working long hours or not.)
Now, how can you reduce this opportunity cost?
You’ll make it a must to grow your trading account.
Let's say you consistently achieve 50% a year from day trading.
If you have a $100,000 account, 50% is $50,000.
But if you have a $200,000 account, then 50% is now a $100,000.
And if you have a $500,000 account, then 50% is now $250,000.
You get my point.
So if you want to overcome opportunity costs, make it a must to grow your trading account!
Because the big money is made through compounding, not withdrawal.
If you constantly withdraw from your trading account, your account gets smaller and smaller and it's very difficult to compound.
It's very difficult to earn a healthy income from it.
So you've got to make it a must to grow your trading account.
It might be through working some part-time jobs, finding external funding sources or investors.
With that said, let's do a quick recap to what I’ve covered so far…
- Trade with a low-cost broker to reduce the impact of transaction costs
- Start with a decent account size – I recommend at least $100,000
- Set aside 12 months of living expenses
- Be prepared, you’ll spend hours in front of the screen
- Make it a must to grow your account to let the power of compounding work for you